How Long Should You Keep Tax Records?

As with almost every question relating to taxes, there is not one simple answer.

How long does the IRS say I need to keep my records?

A good place to start looking for answers is with the IRS. The IRS generally has three years from the date you file your return to start an audit.  If the return does not report all your income, the IRS can start an audit within six years.  If a return is fraudulently prepared, the IRS can open up an audit at any time, regardless of how long it has been since the return was filed.

What about the state?

What makes the question of how long to keep information so much more complicated is that each state has different rules.  For example, there is not statute of limitations on how long the state of Pennsylvania can wait to question your tax return.  My firm frequently works with delinquent PA taxes, and we’ve seen the state dredge up old tax years.  It is important to keep in mind that in matters of taxation, you are in essence guilty until proven innocent.  If the state of Pennsylvania says you owe taxes (with penalties and interest of course) from 10 years ago, it is up to you to prove them wrong.  Without the required information such as W2s, business info, or stock transactions, which you most likely have long since parted with, this may prove to be impossible.

Here’s the easy answer:

With today’s technology, it may be manageable for you to scan in all of your tax info and save it somewhere deep in your computer, or even in the cloud.  If this is the case, why not keep scanned records of all of your tax info and dispose of the paper copies?  This way you still have all of the info should an issue ever arise.  You also remove the clutter of keeping paper records.  If scanning all of the documents isn’t feasible, here are some extra guidelines for keeping information.

General Guidelines:

1. Keep all the records you need to substantiate items in your return for three years.  This means all the W-2 forms, the 1099 forms and other receipts to document income reported and deductions claimed.
2. For investment transactions, you need to be able to prove your basis in the investment in the year you sell it.  This means keeping purchase confirmations until you sell the security and then for the three years after that.  Another way to handle this is just to keep all statements showing transactions from the brokerage firm or mutual fund company.
3. For real estate transactions, including your home, you need to be able to substantiate your original cost and any improvements made during your ownership.  Once you sell the real estate, the three-year rule applies.  For the sale of your home, if you had deferred the recognition of a gain on a prior home before May 7, 1997, you need to be able to take that deferred gain into account and document the prior home’s cost and improvements.
4. You should probably keep copies of your tax returns forever.  The IRS can provide copies for a charge, but having your own copies make it easier to refer to them if needed.
5. You should keep copies of your W-2 Forms (wage information) until you start receiving Social Security benefits.  This can enable you to correct any inaccurate information they may have and protect your benefits.
6. And finally, when in doubt about a certain item, it probably makes sense to keep it, at least for a couple of years.